Guidelines on the management of interest rate risk arising from nontrading book activities 2 abbreviations alco asset and liability management committee alm asset and liability management bcbs basel committee on banking supervision bsg banking stakeholder group cet1 common equity tier 1 csrbb credit spread risk from nontrading book activities crd capital. When interest rates change, the present value and timing of future cash flows change. Such unconventional monetary policy has an impact on interest rates, and therefore, requires a closer monitoring of the interest rate risk in the banking book irrbb. Interest rate risk on the banking book springerlink. Nevertheless, abnormal levels of interest rate risk may expose banking corporations to losses and even pose a threat to their capital. The basel committee on banking supervision bcbs finalised its pillar 2 capital framework for interest rate.
Rates expectations its no secret that bank regulators are looking to fill a gap in the capital framework by introducing a charge for interest rate risk in the banking book. Introduction interest rate risk in the banking book or irrbbas defined by the basel committeeis the current or. Interest rate risk is an integral part of banking business, and may even be a source of profit. The management of interestrate risk in the banking book irrbb has been. Interest rate risk in the banking book irrbb refers to the current or prospective risk to the banks capital and earnings arising from adverse. A framework for managing interest rate risks about the authors geetha venkataramani is an assistant consultant with the risk management and banking practice in the banking and financial services bfs business unit at tata consultancy services. On june 8, 2015, the basel committee on banking supervision published a consultation paper on the risk management, capital treatment and supervision of interest rate risk in the banking book. Interest rate risk in the banking book irrbb definition. The basel committee for banking supervision bcbs published the final standards on interest rate risk in the banking book irrbb on april 21, 2016. Interest rate increase 35 interest rate decrease 36 1. Annex 3 the risksensitive threshold capital framework. Standards for interest rate risk in the banking book issued. In april 2016, the basel committee on banking supervision bcbs issued final standards for irrbb that replace the 2004 principles for the management and supervision of interest rate risk. Local implementation of basel committee standards on interest.
What is interest rate risk in the banking book irrbb. Apr 21, 2016 banks face tighter rules on interest rate risk in basel revamp. The consultative document on the risk management, capital treatment and supervision of interest rate risk in the banking book irrbb expands upon and is intended to ultimately replace the basel committee s 2004 principles for the management and supervision of interest rate risk. Interest rate risk in banking book irrbb refers to the current or prospective risk to a bank s capital and earnings arising from adverse movements in interest rates that affect banking book positions. Article interest rate risk in the banking book irrbb fis. Interest rate risk in the banking book irrbb refers to the current or prospective risk to the banks capital and earnings arising from adverse movements in interest rates that affect the banks banking book positions. Secretariat of the basel committee on banking supervision bank for international settlements ch4002 basel switzerland re. Basel cuts credit spread charge from banking book work. Whitepaper a summary of bcbs interest rate risk in the.
Interest rate risk in the banking book or irrbbas defined by the basel committee is the current or prospective risk to a bank s capital and earnings, arising from adverse movements in interest rates that affect the bank s banking book positions. Banks earn returns to shareholders by accepting and managing risk, including the risk that borrowers may. Osfi believes that the allocation of capital to risk is an integral. The interest rate risk in banking book refers to the risk to a banks capital and. These standards replace the principles for the management and supervision of interest rate risk from july 2004 and build up on the consultation phase. In april 2016, the basel committee on banking supervision bcbs published the final standard on capital framework for interest rate risk in the banking book irrbb. These standards are intended to replace an earlier guidance set out in the 2004 principles for the management and supervision of interest rate risk4, which laid out the principles and.
Basel committee consults on interestrate risk bloomberg. Interest rate risk is a bank s exposure to adverse movements in interest rates. Guidelines on the management of interest rate risk arising. Apr 21, 2016 london, april 21 ifr the basel committee has outlined new standards that banks should adopt for measuring interest rate risk in their banking books, set to come into force from 2018. Interest rate risk in the banking book is the risk posed by adverse movements in. Capital adequacy framework basel ii riskweighted assets.
The view expressed by the basel committee in the basel ii capital accord receives strong support. Any changes in interest rates have an impact on the present value of future cash flows on the bank. Supervisory policy manual spm module on interest rate risk management ir1 by june 2017. Treasury pool management hedges the transferred net banking book risk with deutsche bank s trading books within the cib division. Final bcbs standards on interest rate risk in the banking. Moreover, a quantitative impact study qis was published within the basel iii monitoring environment on july 31, 2015 in order. Basel committee consults on interest rate risk in the. The committee s most recent release on this topic forms part of the proposed new basel capital accord.
The new standards set out the committees expectations on the management of irrbb in terms of identification, measurement, monitoring, control and supervision. For the ebf position paper on interest rate risk in the banking book, please consult the following link. In its longawaited consultation paper on interest rate risk in the banking book irrbb, published on june 8, the basel committee on banking supervision proposed a standardised capital framework the socalled pillar 1 approach alongside. Due to the heterogeneous nature of this risk, it is captured in pillar 2. Interest rate risk in the banking book deloitte south africa. Guidelines on technical aspects of the management of interest. In 2016, the basel committee on banking supervision bcbs issued new.
Sensitivity analysis of irrbb stress test 2017 final. The new basel committee on banking supervision bcbs standards. The interest rate risk in banking book refers to the risk to a banks capital and earnings arising from adverse movements in interest rates that affect banking book positions. The aba has been opposed to a standardised pillar 1 capital requirement for interest rate risk since the beginning. The standards revise the committee s 2004 principles for the management and supervision of interest rate risk, which set out supervisory expectations for banks identification, measurement, monitoring and control of irrbb as well as its supervision. Interest rate risk in the banking book consultative. The basel committee on banking supervision has today issued standards for interest rate risk in the banking book irrbb. The basel committee recently published the revised standards for interest rate risk on the banking book. The basel committee on banking supervision released a consultation paper in june outlining two possible ways of determining capital charges for interest rate risk in the banking book irrbb. Although the basel committee considers that interest rate risks in the banking book merit support from capital, they are omitted from the calculation of the. Interest rate risk in the banking book irrbb therefore reflects both the bank s fundamental business model and its assetliabilitymanagement alm strategy. This chapter describes requirements on assessing interest rate risk in the banking book, ie the current or prospective risk to a bank s capital and to its earnings, arising from the impact of adverse movements in interest rates on its banking book. Letter to european commission on the implementation of the.
On december 7th the basel committee for banking supervision has published its final documents on the reform of basel iii which are commonly referred to as basel iv. In april 2016, the basel committee on banking supervision issued its final standards for irrbb interest rate risk in the banking book. Basel committee on banking supervision, interest rate risk in the banking book april 2016. In april 2016, the basel committee on banking supervision finalised a new. The management of interest rate risk is therefore critical to the stability of any banking corporation. Nii, on the other hand, is always based on cash flows at client rates and thus represents total nii. Interest rate risk in the banking book irrbb is part of the basel capital frameworks pillar 2. In particular, no significant deviation from the bcbs standardised. There are two prescribed approaches to calculate the market risk. The issue was felt to be adding too much complexity to the overhaul of muchdelayed rules on interest rate risk in the banking book irrbb. Interest rate risk in the banking book over the past decade the basel committee on banking supervision the basel committee has released a number of consultative documents discussing the management and supervision of the interest rate risk inherent in a bank s balance sheet 1. Relates only to a bank that calculates the relationship between interest rate movements or shocks and non interest income, bad debts and other relevant variables.
Deutsche bank annual report 2017 nontrading market risk. Interest rate risk in the banking book risk library. Nov 11, 2016 irrbb interest rate risk in the banking book 1. The treatment of interest rate risk in our trading portfolios and the application of the valueat risk model is discussed in the trading market risk section of this document. Jun 09, 2015 the basel committee on banking supervision bcbs has published a consultative document, interest rate risk in the banking book.
Comments in response to consultative document interest rate risk in the banking book ladies and gentlemen. The group of central bank governors and heads of supervision ghos approved today the long awaited basel committee for banking supervisions revisions to the market risk. Basel committee finalizes longawaited market risk framework. Our hope now is that a pillar 2 approach will not include standardised elements as well. Basel faces challenge on charge for interest rate risk in the. On june 8, 2015 the basel committee for banking supervision bcbs published the consultative paper 319 on interest rate risks in the banking book, which has been developed by the task force on interest rate risk in the banking book tfir over the last years. Review of the irr principles and proposal for an enhanced pillar 2 capital.
Department of banking regulation reserve bank of india, central office mumbai 400 001. The new basel committee on banking supervision bcbs standards for irrbb come into force january 1, 2018. In response to the new standards, the hkma published a consultation paper regarding the proposal to update the current spm module ir1 interest rate risk management and the return of mabs12 interest rate risk exposure in june 2017. Both papers combined will have a significant impact on how banks measure, monitor, hedge and manage their interest rate risk. Basel committee sets bank standards to manage interest. The basel committee on banking supervision bcbs issued new standards on irrbb in april 2016. Standards on the interest risk in the banking book irrbb. A response to the basel committees consultative document on interest rate risk in the banking book by the british bankers association september 2015 introduction the bba is the leading association for uk banking and financial services representing members on the full range of uk and international banking issues. Interest rate risk in the banking book april 2016 basel committee basel committee on banking supervision calculation date the date with reference to which an adis irrbb capital charge is calculated, such that the exposures and observations of interest rates used in the calculation are recorded at the close of business on that day. This report presents the outcome of the basel committee on banking supervisions the committee 1 work over recent years to secure international convergence on revisions to supervisory regulations governing the capital adequacy of internationally active banks. Basel committee sets bank standards to manage interest rate.
In april 2016, the basel committee on banking supervision bcbs issued final standards on. But with the rules likely to arrive as rates start to be hiked, theres a lot riding on the project. An analysis of commercial bank exposure to interest rate risk. In the consultative document the bcbs sets out two options for the regulatory treatment of interest rate risk in the banking book irrbb. Basel abandons plans for pillar 1 rates risk charge. The bcbs published its standards on interest rate risk in the banking book. This white paper focuses on understanding how current market conditions low interest rates can affect banks revenues and profitability. The interest rate risk in banking book refers to the risk to a bank s capital and earnings arising from adverse movements in interest rates that affect banking book positions. Interim public capital disclosure requirements related to basel iii pillar 3. London, april 21 ifr the basel committee has outlined new standards that banks should adopt for measuring interest rate risk in their banking books, set to come into force from 2018. The way ahead executive summary interest rate risk in banking book irrbb refers to the current or prospective risk to a banks capital and earnings arising from adverse movements in interest rates that affect banking book positions. In april 2016, the basel committee on banking supervision bcbs published standards on interest rate risk in the banking book irrbb. Interest rate risk in banking book irrbb refers to the current or prospective risk to a banks capital and earnings, arising from adverse movements in interest rates that affect banking book positions.
A financial institutions banking book is composed of all assets that are not actively. Interest rate risk in the banking book irrbb is currently part of the basel capital frameworks pillar 2. The final standard updated a set of principles laid out in 2004, to reflect changes in the market and supervisory practices. The irr principles lay out the basel committee s expectations for banks identification, measurement. Bankers will be caught offguard by this costly proposal, which some say ignores the fundamental difference between banks trading and banking books. Regulators forge compromise on banking book rate risk. The standards, issued for the first time in more than a decade, introduced a strengthened pillar 2 approach and set out supervisory expectations for banks identification, measurement, monitoring and control of irrbb as well as its supervision. This is known as interest rate risk in the banking book or irbb. Basel iv revised trading and banking book boundary for. First, to help ensure that banks have appropriate capital to cover potential losses from exposures to changes in interest rates. Meeting the practical challenges highlights the new basel committee on banking supervision bcbs standards for irrbb come into force january 1, 2018. The updated spm module will largely follow the new bcbs standards, with minor adjustments reflecting specific characteristics of the local banking system. Although the bcbs did not retain a minimum capital requirement mcr. Interest rate risk in the banking book irrbb bankinghub.
The new standards will apply from january 2018 onwards but some supervisors have already given a lot of attention to how irrbb is monitored and managed at many banks, given the current concerns about the lingering low interest rate environment. Basel committee on banking supervision, basel iii monitoring report december 2017 results of. These standards are intended to replace an earlier guidance set out in the 2004 principles for the management and supervision of interest rate risk. Interest rate risk in the banking book irrbb more specifically refers to the current or prospective risk to the bank s capital and earnings arising from adverse movements in interest rates affect the institutions banking book. The standards revise the committees 2004 principles for the management and supervision of interest rate risk, which set out supervisory expectations for banks identification, measurement, monitoring and control of irrbb as well as its supervision. This publication can be found online on the ebf website and is subject to regular updates. Basel committee on banking supervision consultative document. The basel committee on banking supervision has issued a consultative document on the risk management, capital treatment and supervision of interest rate risk in the banking book. Banks face tighter rules on interest rate risk in basel. The consultative document on the risk management, capital treatment and supervision of interest rate risk in the banking book irrbb expands upon and is intended to ultimately replace the basel committees 2004 principles for the management and supervision of interest rate risk. Regulators take softer line on banks interest rate risk. Management of interest rate risk in the banking book irrbb is starting to.
Basel committee on banking supervision said the risk posed by changes in interest rates is material, especially at a time. We also believe that some adjustments to the basel committee on banking supervisions bcbs standards disclosure requirements should be considered to ensure the provision of valuable public information. In april 2016, the basel committee on banking supervision issued interest rate risk in the banking book standards, which revise the 2004 principles for the management and supervision of interest rate risk. Basel committee raises flag over new interest rate capital. Implementing bcbs 368 interest rate risk in the banking book in. Most jurisdictions follow this approach, which is based on the committees. Basel pillar iii disclosures calendar year 2017 ubs. Standards for interest rate risk in the banking book. These guidelines on managing interest rate risk in the banking book are intended to provide guidance on designing the strategies and processes required for identifying, measuring, controlling and monitoring interest rate risks in the banking book. The new standards set out the committee s expectations on the management of irrbb in terms of identification, measurement, monitoring, control and supervision.
Basel committee guidance a bit of history 1993 consultative paper on measuring banks exposure to interest rate risk 1997 principles for interest rate risk management in both banking and trading books 2004 principles for the management and supervision of interest rate risk. Banks reject nmd maturity limits in interest rate risk. Nontrading market risk deutsche bank annual report 2017. Interestrate risk in the banking book irrbb regtech. Eve is defined as the maximum change in the present value of interestbearing assets, liabilities excluding capital, and offbalance sheet items across six. Basel committee on banking supervision consultative.
Letter to eba on the implementation of the basel committee. Whitepaper interest rate risk in the banking book irrbb. Archives bcbs basel committee on banking supervision. Bcbs standard for interest rate risk in the banking book. Irrbb consultative paper on interest rate risk in the. Interest rate risk in the banking book irrbb is currently part of the basel capital. Interest rate risk in the banking book is the risk posed by adverse movements in interest rates that cause a mismatch between the rates banks set on customer loans and on deposits. In april 2016, bcbs issued standards for interest rate risk in the banking book.
Banking book basel committee on banking supervision bcbs deposits. Interest rate risk on the banking book irrbb is defined as the current or perspective risk to the banks capital and earnings arising from adverse movements in the interest rates that affect the institutions banking book positions bcbs, 2015. This paper looks at the standards from a practical implementation point of view and raises some of the main challenges. In april 2016, the basel committee on banking supervision bcbs issued final standards on irrbb that replace the 2004 principles for the management and supervision of interest rate risk. A first irrbb consultation has been in the works since 2012, and is now expected in time for a june meeting of the basel committee, the sources. For example, if rates were to increase and a bank s deposits repriced sooner than its loans, it could result in the bank paying out more interest on deposits than the interest it is receiving from loans. An analysis of commercial bank exposure to interest rate risk david m. In the european union, irrbb is captured under the capital requirements. Whitepaper implementing interest rate risk in the banking. The standards have been enhanced with specific details on how to measure the risk on both. A surprising basel committee proposal a new capital charge for interest rate risk held in the banking book is set to challenge banks business models and will limit arbitrage opportunities. The international standards do not apply to community banks. After several years of indepth discussions amongst regulators as well as with the industry, the bcbs reaffirmed its previous, longstanding position that irrbb is more appropriately captured in a pillar 2.
Apr 21, 2016 nonetheless, the committee considers the interest rate risk in the banking book to be material, particularly at a time when interest rates may normalize from historically low levels, the. Interest rate risk in the banking book over the past decade the basel committee on banking supervision the basel committee has released a number of consultative documents discussing the management and supervision of the interest rate risk inherent in a banks balance sheet 1. Interest rate risk in banking book irrbb refers to the current or prospective risk to a banks capital and earnings arising from adverse movements in interest rates that affect banking book positions. This document sets out principles that should be used in evaluating the adequacy and effectiveness of a bank s interest rate risk management, in assessing the extent of interest rate risk run by a bank in its banking book, and in developing the supervisory response to that risk.
Two risk management metrics ecbpublic the two metrics are discussed in detail in the eba guidelines on the management of interest rate risk arising from nontrading activities and in the bcbs standards on irrbb the main items included in the banking book. The first imposes a standardised capital requirement, while the second leaves the decision on. Leeto tlou and jonathan hacker provided assistance. Houpt, of the boards division of banking supervision and regulation, prepared this article. These standards apply to internationallyactive institutions. Irrbb interest rate risk in the banking book a bearingpoint accelerator eba and the basel committee reacted to the current low interest environment with new or further detailed requirements for banks dealing with the risk arising from general banking business, known as interest rate risk in the banking book irrbb. Following the publication in april 2016 of the new standards on interest rate risk in the banking book irrbb by the basel committee on banking supervision bcbs, deloitte invited european and south african banks to participate in an online survey to assess their current state of readiness against the new basel standards. Due to different fixed interest rates of assets and liabilities allocated to the banking book, credit institutions are exposed to a risk of changing interest rates on the money and capital markets. Bcbs finalises reforms on risk weighted assets rwa the basel committee on banking supervisions announcement december 2017.
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